ASIAN JOURNAL OF MANAGEMENT RESEARCH Online Open Access publishing platform for Management Research

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1 Online Open Access publishing platform for Management Research Copyright by the authors - Licensee IPA- Under Creative Commons license 3.0 Research Article ISSN Foreign direct investment activities of small and medium sized enterprises, the links between China and Kenneth A Grant 1, Yubin Bai 2 and Fei Yuan 3 Ryerson University, Toronto, ON, Canada kagrant@ryerson.ca ABSTRACT In addition to its rapid emergence as one of the world s largest markets and exporters, China is also garnering increasing interest as a place to invest and a source of investments. This study examines Foreign Direct Investment (FDI) from China to Canada and Canada to China from the perspective of Small and Medium-sized Enterprises. SMEs are a major contributor to the economies of China and Canada, however there has been very little focus on research into their foreign investment activities. Drawing on interviews with 19 Chinese and Canadian SMEs, this study reports on the attitudes and behaviours of the leaders of Chinese and Canadian SMEs and provides insight into the motivators and barriers they face in their foreign investment activities. Keywords: SME, inbound FDI, outbound FDI, China, Canada 1. Introduction In both China and Canada, Small and Medium-sized Enterprises (SMEs) are seen as a vital part of the economy. This study investigates the determinants and motivations of outward Foreign Direct Investment (FDI) by SMEs in two directions from China to Canada and Canada to China. The focus is on Outward Direct Investment or ODI. It is an exploratory study intended to set the scene for more detailed future study. 1.1 SMEs contribution to Chinese inbound and outbound FDI In the late 1970s, the Chinese economy started to emerge and integrate with the global economy after the Open Door Policy. Chinese economic growth was boosted by China's WTO accession in Today, China is the second largest economy after the United States, and the largest FDI recipient (UNCTAD, 2012). In the past decade, China's outward FDI has also increased sharply. China's FDI outflows have increased from $21 billion in 2006 to $100 billion in 2013 (UNCTAD, 2013). SMEs are playing an increasingly important role in the Chinese economy and business internationalization (Cardoza and Fornes, 2011; Jansson and Söderman, 2012). Meanwhile, Chinese governments at different levels are actively pursuing international expansion of SMEs (Cardoza and Fornes, 2011). According to a report by Deloitte (2013), China contributed 128 fast growing companies to the top 500 fast growing companies in Asian Pacific and ranked the first in Asian Pacific. Most of those have begun their international expansion. 34

2 Despite this, only limited investigation has been done about China's outward direct investment and the international expansion of Chinese firms, compared to the level of research focusing on China's inward FDI and MNEs expansion to China. Further, the research on outward FDI from emerging economies, such as China, have mainly focused on the international expansion of large state owned enterprises (SOEs) and multinational enterprises (MNEs) (Child and Rodrigues, 2005; Mathews, 2006; Boisot and Meyer, 2008). SMEs represent about 70% of China's exports, which is around 10% of the world's imports (Cardoza et al., 2013). Given the high export volume created by Chinese SMEs, many of those have failed to develop competitiveness for foreign expansion (Jansson et al., 2008; Jansson and Söderman, 2012). 1.2 Canadian FDI in china SMEs contributions to the Canadian economy include export revenues, employment and GDP growth. In 2012, 99% of the 1.1 million Canadian businesses are small or mediumsized companies. Together these SMEs contributed 40% of exports (approximately $150 billion in 2011), creating about 30% of Canada s GDP. SMEs employed more than 6.8 million Canadians, representing 64% of private sector employment. In the decade from , 54% of the jobs created in the private sector were from SMEs (Industry Canada, 2013). As mentioned earlier, China is now the world s biggest inbound FDI receiver. In 2014, mainland China received $128 billion of FDI with Hong Kong receiving another $111 billion (combined, these total about 10% of the global total FDI inflows), followed by the US, which received $86 billion and was also the global leading FDI investor (BBC News, 2015). However, despite being the 11th largest economy, Canadian outward FDI to China only accounted for 0.4% of total inward FDI in China in 2013 and the $ 0.49 billion FDI investment Canada made to China was only 0.6% of total Canadian Direct Investment. Thus, when compared to other developed economies investments in China, Canadian s investment is relatively small, indicative of an investment relationship that does not correspond to the trading relationships of these two countries. The situation described above is somewhat puzzling. According to Foreign Affairs and International Trade Canada (2013), China is Canada s 2 nd largest trading partner and is also the most important market in Asia (DFDTD, 2012) yet China is not a major destination for Canadian FDI, and vice versa. 1.3 The Purpose of this Study Given the level of international trade between Canada and China the level of Foreign Direct Investment between the two countries is very low. To the degree that this phenomenon has been studied, the work has focused on large multinational enterprises (MNEs). This exploratory study considers the theory behind FDI, with specific emphasis on SME behaviour and investigates the views of a small sample of Canadian and Chinese SMEs. 2. Review of literature 2.1 Theoretical background 35

3 The OECD (2003) has defined FDI as international investment by a resident entity in one economy ("direct investor") in an enterprise resident in another economy ("direct investment enterprise") made with the objective of obtaining a lasting interest. Mathews (2006) has defined internationalization as the process of the firm s becoming integrated in international economic activities. In recent international business literature, two streams of research have emerged: (1) international entrepreneurship (2) strategy in emerging economies (Yamakawa et al., 2008). Within the two streams, most of the research is about foreign entry from developed economies to emerging economies (Meyer, 2004; Yamakawa et al., 2008) General Theories on FDI One of the most fundamental questions about FDI is what motivates a firm to invest in foreign countries. In his early seminal work on FDI, Dunning (1993) suggested three main motivations: Foreign market seeking FDI: Foreign market seeking FDI provides access to foreign market and support existing export. Efficiency seeking FDI: Companies conduct efficiency seeking FDI by investing in low-cost location for operation. Resource seeking FDI: Resource seeking FDI helps firms to secure raw material supply. In the context of general equilibrium, companies that are more productive tend to invest in foreign countries while less productive companies tend to export (Helpman et al., 2003). Another reason to invest is to build a platform for exports to its neighboring countries (Ekholm et al, 2007). Partial equilibrium analysis of external FDI determinants include exchange rate effects, taxes, institutions, trade protections, and trade effects (Blonigen, 2005). Internal factors, such as RandD intensity and advertising intensity, also affect the FDI decision (Blonigen, 2005). Moosa (2002) suggests that from the host country (recipient) perspective, FDI activities can be divided into three categories: Import-replacing FDI: in this category of FDI, the products previously imported by the destination market are produced in the host market, thus reducing the export of these products to the investor s home market, and the imports of the invested country from the investor s home country; Export-promotion: The FDI investment in the destination market helps enable the host country to increase its export to the investing market and also other markets. Government-initiative: This FDI is encouraged by government policies or incentives to create a preferred environment for foreign investment Special theories for Chinese outward FDI When compared with the rich literature focusing on the international expansion of MNEs, there has been limited investigation of the characteristics of internationalization of China's SMEs. Recent works about internationalization of SMEs are based on studies of Japan and Taiwan, whose business environments are different from China (Lu and Beamish, 2001; Lu and Beamish, 2006; Kuo and Li, 2003; Li and Hu, 2002). More recently, after 2010, there has been a sharp increase of "investment emigration". Rich and highly educated people are leaving the country. "Among those who possess more than 100 million Yuan, 27 % have 36

4 already emigrated while 47% are considering leaving" (Xin, 2011; Wang 2013). Those rich Chinese who emigrate to developed countries are mostly entrepreneurs who own SMEs in China and they are potential transnational entrepreneurs in destination countries. Looking for business opportunities is a prime reason for transnational entrepreneurs migration (Lin and Tao, 2012). The traditional theories of FDI were built based on the study of MNEs in western economies. The emerging economies such as China and western economies do differ greatly. Therefore, specialized theoretical frameworks should be considered (Child and Rodriguues, 2005; Buckley et al., 2007; Barney and Zhang, 2009; Kolstad and Wiig, 2012). In this context, Buckley et al. (2007) classified theories into three categories: 1. Capital market imperfections 2. Special ownership advantages 3. Institutional factors Many works on China focused on the first category, very little has been done on the other two. Capital market imperfections include the following particular and relational imperfections about the China's business environment (Buckley et al., 2007): state-owned firms can access loans at below market rate (Warner et al., 2004); potential outward investors can get soft loans from inefficient banking systems (Child and Rodrigues, 2005; Warner et al., 2004); internal capital market subsidizes FDI of conglomerate firms effectively (Liu, 2005); family owned firms borrow money from family members (Erdener and Shapiro, 2005; Child andpleister, 2003). Morck et al. (2008) provided three rationales for China's ODI: 1. Chinese companies, with vast experience in navigating complex bureaucracies, might do well in countries with similar institutional environments; 2. In certain maturing industries, outward FDI from China, even into advanced economies, might make economic sense; 3. China's outward FDI may be justified economically to SOE insiders who overvalue control owing to their distrust of markets and sense of national pride. The characteristics of Chinese ODI were identified in recent literature. According to two studies in 2012, "Chinese outward FDI is attracted to large markets, and to countries with a combination of large natural resources and poor institutions" (Kolstad and Wiig, 2012); particularly, "state-controlled firms are attracted to countries with large natural resources and risky political environments", and "private firms are more market seekers" (Ramasamy et al, 2012). Furthermore, increasing international reserves support China's ODI (Cheung and Qian, 2009). Trade related investment is being replaced by defensive and offensive FDI, and strategic asset seeking FDI is becoming more important (Buckley et al., 2008). Child and Rodrigues (2005) analysis demonstrated four differences of Chinese ODI characteristics: 1. The Latecomer Perspective; 2. Institutional Analysis and the Role of Government; 3. Entrepreneurs and Institutions; 4. Liability of Foreignness 37

5 Three routes of internationalization by Chinese firms, which are OEM/Joint Venture, Acquisition and Organic international expansion, and the pros and cons of these three routes were discussed by Child and Rodrigues (2005). OEM/Joint Venture is the most popular one among the three routes (Child and Rodrigues, 2005; Boisot and Meyer, 2008). Based on the above, it seems that the findings about Chinese outward FDI are fragmented and less systematic. Previous research works used secondary data and lack firm-level data. (Yamakawa et al., 2008; Fornes and Cardoz, 2012). Most of the past research in this context were case studies or based on national level data. Chinese SMEs outward FDI is a relatively new business phenomenon, despite the important role SMEs is playing in the globalization of Chinese economy. Chinese private firms, most of which are SMEs, were not allowed to invest abroad before 2003 (Liang et al., 2012). Cardoza and Fornes (2011) also suggest that the possible explanation could be the rapid pace of change in the Chinese economy. In order to integrate previous findings into a comprehensive conceptual framework, this paper analyzes the aspect of Chinese SMEs outward FDI and group them into three categories: (1) Motivations, (2) Stimulators, (3) Barriers. 2.2 Motivations General Theories of FDI Motivation The motivations of firms international expansion has been a core interest of researchers. In their early works, Buckley and Casson (1976) suggest that firms intend to internalize missing or imperfect market through outward FDI and firms choose investment destinations where they can minimize their overall operation. In the context of outward internationalization, past research can be categorized into two perspectives: the mainstream prospective and the emerging prospective (Liang et al., 2012). Among mainstream theories, Dunning s eclectic paradigm, a theory of multinational advantage, is one of the most influential theories. International firms can benefit from certain firm-specific advantages in the process of outward internationalization and invest into operation abroad (Dunning, ). Dunning classified these advantages into three categories of motivation of international expansion: Ownership-specific advantage: Ownership-specific advantage comes from the superior resource and asset, such as brand, technologies at home country. Location advantage: Location advantage is the potential advantage of integrating activities across different sectors of the world with vary factor cost and resource cost. Internalization advantage: Internalization advantage refer to the advantage of promoting economy of scale and scope by internalizing activities within a globalized firm through outward FDI rather than be scattered to numerous firms (Dunning, 1988, 1993, 2001): The eclectic paradigm was first developed to explain MNEs international business activities (Dunning, 2001). However, it is also a helpful tool to analyze the internationalization of non-western types of organizations (Dunning, 2001; Erdener and Shapiro, 2005; Lu et al., 2011; Liang et al., 2012). 38

6 SME owner-managers have significant impact on the behavioral characteristics of SMEs, and the cultural orientation of the owner-managers largely determines these behavioral characteristics (Lloyed-Reason and Mughan, 2002). The cultural values also helped to create a highly centralized decision-making process in Chinese business organizations, especially in SMEs. Therefore, the personal goals of owner-managers could be the motivations of SMEs Motivation for Chinese SMEs Outward FDI As mentioned before, Dunning (1993) suggested three primary motivations for FDI in his eclectic paradigm which is originally build for western MNEs: foreign-market seeking; efficiency seeking; and resource-seeking. In the case of China, firms will adopt outward FDI for traditional market seeking reasons similar to western firms. However, it is unlikely that they will undertake efficiency seeking FDI given that China s labor cost is relatively low. Chinese firms, especially large State Owned Enterprises (SOEs), tend to invest in foreign countries including developed countries to secure raw material supply. (Buckley et al., 2006). Chinese SOEs also acquire national strategic resources as agent of Chinese government. Dunning (2001) also suggested that the only way to acquire a specific asset in advanced economies, such as brand names or RandD facilities, is through acquisition of the firm. Seeking market opportunities and acquiring strategic asset are potential motivation factors for Chinese SMEs outward FDI. Chinese SMEs have certain advantages over Chinese State Owned Enterprises (SOEs) in terms of competitive capacity in the global market and outward FDI. Comparing with western MNEs, Chinese SOEs are weak in technology, RandD capacity, brand development, and marketing in global market (Nolan, 2001). The weaknesses are likely the result of regional protectionism in domestic market, funding from government and state owned bank, and government procurement (Nolan, 2001). Chinese firms benefit from market imperfection, which can be transformed into special ownership advantage (Buckley, 2004; Buckley et al., 2007). However, most Chinese SMEs do not have those funding advantages from governmentprovided fund and soft loans from inefficient banking system. Rather, Chinese SMEs are facing capital market imperfection disadvantage when they are competing with SOEs in the domestic market. In China, SMEs cannot benefit from funding from the state in their international expansion (Fornes et al., 2012). Therefore, those advantages and disadvantages for Chinese SOEs in their outward FDI activities cannot be applied to Chinese SMEs. On the other hand, family owned firms, which are mostly SMEs, can access capital at below market rates from family members (Erdener and Shapiro, 2005; Child and Pleister, 2003; Buckley et al., 2007). The rapid internationalization of Chinese firms was achieved through organizational innovations and strategic innovations (Mathews, 2006). Chinese SMEs have advantages in term of organizational innovations comparing with Chinese SOEs, because SMEs have a less bureaucratic organization structure and are generally less risk averse. Many wealthy Chinese decided to migrate to developed countries, such as Canada and the US, for better environment and social security. Many of them started their business in the target country and became Transnational Entrepreneurs (TEs). Transnational entrepreneurs are defined as immigrants who are engaged in border-crossing business activities involving 39

7 their country of origin and destination (Lin and Tao, 2012). Many of them still own business in China after their landing in destination countries and their new business in foreign countries is of their SMEs international expansion. TEs increase bilateral trade and investment by utilizing resources in both countries. (Yeung, 2002; Lin and Tao, 2012). Thus TEs are a source of outward FDI and therefore transnational entrepreneurship is a motivation for Chinese SMEs FDI. As mentioned before, the personal goals of owner-managers of Chinese SMEs also influence the activities of SMEs. Given the unstable legal and regulation environment of China, international financial asset diversification is a common way to address the issue of high risk and constrains in domestic financial market. It is commonly recognized that international diversification of investment portfolio can increase investor interests (Lessard, 1976). Outward FDI can help Chinese investors to avert risks and institutional constraints in domestic financial market. Conducting FDI can be a source of corporate diversification. 2.3 Stimulators Since the mid-1990s, the Chinese government has promoted outward FDI in order to increase exports, offset competitive disadvantage, and secure strategic raw material, (Rui and Yip, 2008). Previously, this strategy was executed by MNEs cross-border acquisition. In that period, many Chinese firms, mostly state owned enterprises (SOEs), benefited from institutional incentives and minimized institutional constrains (Rui and Yip, 2008). For SMEs, the changing outward FDI policies could provide significant benefits to their outward FDI (Buckley et al., 2008). Lu et al., (2011) argue that the Chinese private firms future outward FDI may be driven by both the push factors of extremely competitive and unfavorable domestic conditions and the pull factor of favorable government policies. Firms from emerging countries exploit their ethnic network and family ties with minority groups in the host country (Lau, 2003). Prior research on Chinese firm s internationalization suggests that the ethnic network plays an important role in the overseas operations of Chinese firms. Chinese firms use the network to find business opportunities, access local labor market, and establish relations with local authorities (Yeung, 1999; Yeung and Olds, 2000). Ethnic Chinese networks can reduce transaction cost and have a significant impact on the bilateral trade (Boisot and Child, 1996; Rauch and Trindade, 2002). Sanctions to reduce opportunistic behavior can be enforced by the local Chinese community (Rauch and Trindade, 2002). Firms also tend to invest in countries with a similar culture background as their home countries for their early outward FDI (Johanson and Vahle, 1997).Within this context, Kogut and Singh (1988) suggest cultural distance between home country and host country influences the selection of entry model. They also suggest growing experience in outward FDI can offset the cultural distance. Market familiarity has a positive influence on the destination choice of earlier outward FDI (Buckley et al., 2007). 2.4 Obstacles and barriers Buckley (2007) suggests that, in the largely state-controlled Chinese economy, firms must deal with highly bureaucratic and burdensome administrative FDI approval procedures as government, at various levels, seeks to influence the amount, direction and scope of outward capital flow. Outward FDI investment projects need government approval. 40

8 A high level of political risk in host country results in a lower FDI inflow (Chakrabarti, 2001). In the case of China, Buckley et al., (2007) suggest the flow and direction of outward FDI are shaped by home country institutions. However, they also find Chinese firms have different risk perception or attitude towards political risks. Unlike western firms, Chinese ODI is attracted by political risk (Buckley et al., 2007). They suggest Chinese firms have abundant experience in operating in a highly regulated and controlled business environment which provides these firms mitigation to high political risks and Chinese firms can receive continuous financial support and political support from government. The discussion of risk mitigation by Buckley et al. was in the context of Chinese MNEs, most of which are state owned. It is very unlikely that Chinese SMEs outward FDI activity will receive direct support from Chinese government. Political risks in the host country should be considered as a barrier of Chinese SMEs FDI. Cultural distance has a negative impact on the destination country of internationalization (Ojala and Tyrväinen, 2007). SMEs prefer to enter a market which is culturally and geographically close and those firms are not in favor of a high commitment entry model (Kumar and Subramaniam, 1997). Cultural distance is a barrier of FDI that cannot be overcame easily by Chinese SMEs when the ethnic network is not available in target countries. International opportunity recognition is also a potential issue for Chinese SMEs outward FDI. Small businesses lack of networks to identify opportunities in foreign market (Graves and Thomas, 2004). 3. Research objectives/research questions/hypotheses Most literature on FDI and foreign trade focuses on multi-national enterprises (trans-national enterprises). Little research has been identified focusing on the motivations and determinants of SMEs FDI. Though theories for MNEs FDI and expansion are also to some degree applicable to SMEs FDI and expansion, the SMEs unique advantages and positioning suggest that one should treat these two subjects differently while doing research (Niosi and Rivard, 1990). The nature of trade and investment between China and Canada is a topic of significant interest, due to the complementarity of the Sino-Canada trade (Canada is rich in natural resources and advanced in technologies, while China is importing from the rest of world to meet its manufacturing demands and is eager to advance its technological prowess), and also because it of Canada s interest in expanding trade with emerging markets, to diversify its trading partners and enhance the stability of its economy (Zhong et al, 2014). This research on the determinants and motivations of Canadian and Chinese SMEs FDI intent is timely and will help fill in a gap that is missing in the current literature on SME FDI intent. The following research questions are addressed: 1. What are the motivations, stimulus, and barriers of Chinese SMEs FDI regarding investment in developed economies, such as Canada? 2. What are the motivations, stimulus, and barriers of Canadian SMEs FDI regarding investment in developing economies, such as China? 3. What kind of knowledge/experience of investments do Chinese SMEs have of Canada and Canadian SMEs have of China? 4. What advice might be given to Chinese and Canadian SMEs to help determine 41

9 whether and how to invest in each? 4. Research Methodology This is a qualitative study, based on semi-structured interviews with individuals involved in or considering foreign direct investment. They are, predominantly, Canadian and Chinese entrepreneurs. 4.1 Participants In both China and Canada interviewees were identified through directories and personal networks. A total of 19 interviews were carried out. In China the participants included owner managers of nine Chinese SMEs which currently or may carry out outward FDI, one Canadian consultant who is specialized in FDI issues, and one Chinese foreign investment and immigration consultant. In Canada eight SME owners and investment consultants participated, all of whom have invested or are considering investing in China, 4.2 Interview Approach and Data Analysis Following an agreement to participate, the interview guide and the interview consent form was sent out beforehand to give participants time to reflect on the interview questions. Where possible the interviews were recorded and transcribed. The interview guide was developed from the analysis of relevant literature. Themes addressed included the motivation to conduct outward FDI, the potential stimulators existing in both China and Canada countries as well as internal obstacles and external barriers. The semi-structured interview guide included open questions to provide the opportunity to discuss questions and issues in depth and detail. The interview notes and transcripts were analysed using a formal coding structure developed a priority from the literature review, with some additional codes identified from the transcript analysis. In total some 40 codes were used in the study. A combination of frequency counts and contextual analysis was used to determine the most significant findings and these are described below. While fundamentally similar, slightly different schemes were used for the Chinese and Canadian interviews, reflecting the different perspectives in each country. 4.3 Analysis and interpretation In this section, the interview results are discussed, first the motivators and stimulators related to FDI for both China-Canada and Canada-China investment are discussed and then barriers for outward FDI in each direction are also examined. The answers to the research questions are presented in the following section. 4.4 Motivations and stimulators 4.5 Motivators for China-Canada Investment 42

10 The main reasons mentioned for Chinese SMEs conducting FDI in foreign countries are: 1. Market seeking 2. Strategic asset seeking 3. Domestic competition and pressure 4. Utilizing the Chinese experience internationally 5. Transnational entrepreneurship 6. Diversification of asset portfolio Among these motivations, market seeking and strategic asset seeking are commonly recognized as motivation for FDI. Most participants see seeking for international market and acquiring strategic assets as reasons for outward FDI. Domestic competition and pressures are identified and FDI could help owner managers and their firms to achieve diversification of their asset portfolio. Two participants said that they have invested abroad because they want to immigrate to Canada and become transnational entrepreneurs. The following factors have been identified as stimulators by participants: 1. Sufficient capital and funding available 2. Chinese institutional environment 3. High purchasing power and large population in host country 4. Strong economic growth in host country 5. Supportive policies for entrepreneurship and FDI activates in host country 6. Positive immigrant polices in host country 7. Ethnic network and host country multiculturalism Those managers who have a clear target country of FDI stated that they have sufficient capital to invest and they can fund the investment internally. Similarly, among four of the managers who have a clear target country for their FDI, three of them mentioned their ethnic network in target countries. Two of the three managers who have conducted FDI and one consultant mentioned the supportive policies in their host countries. While both consultants believe Chinese institutional environment may stimulate SMEs FDI activities none of the managers mentioned Chinese FDI supportive polices at all. The rest of the stimulators only had two or three specific mentions. 4.6 Motivators for Canada-China Investment The motivators most mentioned by the Canadian SMEs for Outward Direct Investment to China were: 1. The very large markets in China 2. Access to more opportunities and options 3. Canadian market and SMEs advantages 4. Resource seeking needs Market demands are large in China and all the interviewees put China s market potential as one of the top motivations for Canadian SMEs FDI in China. Some interviewees looked from the inside of SMEs and the Canadian market and proposed that the small market demand in Canada and the relatively advanced technologies of Canadian SMEs were also motivating them to tap the Chinese market. Some mentioned firm-specific advantages, such as advantages in green, clean and environmental technologies. 43

11 Resource seeking was another major motivation for SMEs investment in China, with participants mentioning lower costs of production, access to good manufacturing facilities and human and natural resources in China. Some also mentioned policy preferences and legal support, recognizing the Chinese government s dominant influence in China s economy. (The policy support the interviewees mentioned is restricted to the areas that the government promote, like green technology, environment protection, and high tech.) 4.7 Barriers for Outward FDI China-Canada Barriers Participants identified a number of barriers that constrain Chinese SMEs FDI, namely: 1. Lack of talent and knowledge to conduct FDI 2. Management challenges caused by different business environment 3. Company structure complexity 4. Opportunities recognition-lack of business network 5. Unfamiliar law and regulation in host country 6. Cultural distance 7. Political risks of host country 8. Lack of external funding Opportunities recognition is the biggest concern of managers. Most managers mentioned that it is difficult for them to identify opportunities in foreign market and expressed their concerns about unfamiliar law and regulation in host countries and the culture difference between China and host countries. Six participants mentioned that lack of talent and knowledge limit Chinese SMEs FDI activities Canada-China barriers Participants raised a number of concerns about FDI in China, of which the most signify were: 1. Lack of connections 2. Lack of Open-Mindedness 3. Cultural Differences 4. Financing Difficulties and Lower Risk Tolerance 5. Increasing Competition in China 6. Increasing Cost in China Entering into Chinese market, the importance of connections or guanxi is seen as very important. It is not just because connections are part of the business environment, but also that connections are a valuable source of guidance and experience. Connections provide the Canadian SMEs with a platform for many needed resources, a bridge to local government, a pool of talents and market information. Canadian SMEs were seen as very cautious. Thus, they mainly made FDI in their conform zones such as North American and Europe They all suggested that only when SMEs owners are open to different practices and environment, 44

12 they can start understanding Chinese market and finding business opportunities. Financing challenges are common problems for all SMEs, When investing in China, participants mentioned, the intrinsic shortage of SME financing, the long-term period of investment return in China and the growing costs for financing. Participants were also concerned that that local competitors are growing stronger and more competitive as the Chinese market matures. In addition, more international enterprises are entering the Chinese market, intensifying the competition. Increased costs for raw materials and labour were also a concern to some. Finally, cultural differences and language difficulties were also a significant concern. This is closely associated with the lack of connections and open mindedness, which can lead Canadian companies to a passive situation and aggravates the negative environment brought by cultural difference and communication problems Responses to the Research Questions This section provides a summary of the responses to each of the research questions. Q1 What are the motivations, stimulus, and barriers of Chinese SMEs FDI regarding investment in developed economies, such as Canada? The motivation of Chinese SMEs FDI can be categorized as: business motivation and personal motivation. Business motivations include market seeking, strategic asset seeking, and domestic competition and pressure. Market seeking is the most commonly recognized motivation among managers and consultants. Personal motivations are overseas migration and transnational entrepreneurship. Seeking better living environment and social security is the major motivation for transnational entrepreneurs followed by business opportunity seeking. Factors that stimulate the FDI from Chinese SMEs include: 1. Sufficient capital and funding available in China 2. Chinese institutional environment 3. High purchasing power and large population in host country 4. Strong economic growth in host country 5. Supportive policies for entrepreneurship and FDI activates in host country 6. Positive immigrant polices in host country 7. Ethnic network and host country multiculturalism Among these stimulators, sufficient funding for FDI has been identified as the most important stimulator. This factor can effect both business motivation and personal motivation. The Chinese institutional environment has both push and pull effects on the FDI of SMEs. Purchasing power, population, and economic growth determined the market size of the host country. Supportive policies for entrepreneurship and positive immigrant polices in host country jointly increase the attractiveness of the host country for transnational entrepreneurs. Existing ethnic networks in the host country and host country multiculturalism can mitigate the liability of foreignness and help Chinese SMEs to identify investment opportunities Those companies which have conducted outward FDI share a common view that Canada is an attractive market for Chinese FDI. Those who have not are either not sure whether they can find opportunities in Canada or feel Canada is not attractive. Being close to the US is a potential positive factor for Canada as a target country for Chinese SMEs FDI. It was also 45

13 suggested that Chinese SMEs should use Canada as a training camp before entering the US market. Q2 What are the motivations, stimulus, and barriers of Canadian SMEs FDI regarding investment in developing economies, such as China? Specifically, the motivations and stimuli identified in this study fall within two groups, one is market expansion and the other is resource seeking. From the market expansion perspective, the Canadian SMEs invest in China because of the large market demands in China. The small market demand in Canada also forces the SMEs to look east. Besides, the relatively advanced technologies possessed by SMEs, a need to diversify markets, and the Canadian Brand Goodwill also serve as stimuli for Canadian SMEs to tap into China, the world s biggest market. From the perspective of resource seeking, the lower cost (in operation, capital acquisition, overhead, resources, etc.), policy preferences for foreign investment, rich natural and human resources, and good infrastructures are factors that allure the SMEs to invest in China. Q3 What kind of knowledge/experience of investments do Chinese SMEs have of Canada and Canadian SMEs have of China? Most of the Canadian interviewees said that they knew about the cultural differences in China and were aware of the importance of connections in the Chinese business background. But it wasn t until they started their business they realized how these things affected their business in China. Those who have already made investments in China all stressed the need to find a trusted partner, who can serve as a bridge for various resource and government connections. Also the participants believe a partner would help guide SMEs in the initial period. The participants expressed their positive attitudes towards the Chinese market. Though faced with increasing competition and rising production costs, the SMEs owners still enjoyed comparative advantages in the Chinese market and are all planning to expand their current facilities. Q4 What advice might be given to Chinese and Canadian SMEs to help determine whether and how to invest in each? Based on the finding of this study, the following recommended solutions should be considered by the managers of Chinese SMEs. 1. Chinese investors should find a local business partner and making good use of Chinese ethnic network. Guanxi, "existence of direct particularistic ties between one or more individuals"(tsui and Farh, 1997), is an essential factor in Chinese business approach (Singh and Garg, 2009). By finding a local partner, investors could establish Guanxi quickly and link to the local ethnic network, which is essential in the early stage of FDI. 2. SMEs should outsource non-core business activities. In a more developed economy, transaction cost is lower than China. Managers should be open minded to outsource some business activities to local suppliers and service providers. By doing so, SMEs could reduce fixed cost and increase the flexibility and the overall risks of FDI can be decreased, especially in early stage. 3. Owners should utilize professional services. Consulting firms, law firms, accounting firms, and other professional service firms can responsively provide organized information about local market, law and regulation, and business environment, which 46

14 have been identified as barriers for SMEs FDI. Professional service could help managers to lower the learning curve in the new business environment. 4. Chinese SMEs should hire experienced local talent. In order to compete in global market, Chinese SMEs could develop the competitive advantage by strengthen their human resource development. Experienced local talent can provide required expertise of conducting FDI and reduce the level of foreign liability. 5. When examining Canadian investment in China, when compared with the theories in the literature, the current SMEs FDI practices also shed light into areas that previous scholars have not covered: 6. The rising production cost in China is eroding benefits from investing in China. For those traditional SMEs, or defensive FDI makers, this might pose a significant barrier, as they go to China mainly for cost reduction purposes. 7. Chinese market is maturing faster than many expected and SMEs FDI maker are already feeling the increasing competition from local competitors. But this may turn out to be good for SMEs FDI, because as the maturing process goes, the market will be more preferable for Canadian SMEs, which are more law-abiding and prefer less government intervention. 8. As China further restructures its economy and upgrades its industries, the traditional manufacturing industries that are labour or- resources intensive will not be welcome to invest in China. On the contrary, companies who have strengths in high tech, green energy, healthy, foods and many other innovative SMEs may find plenty of opportunities in China. 9. This was a preliminary study, reviewing the body of theory in the field and obtaining input from some 19 informed individuals in Canada and China. Thus, as with all small qualitative samples, the degree of generalisability is very limited. However, it does provide some initial insight from the ground hat can form the basis for future research 5. Conclusions This study has provided new insight into the outward foreign direct investment attitudes and behaviours of a small sample of Canadian and Chinese SMEs. The findings demonstrate an interest in FDI, as well as reporting on actual FDI behaviour of some small firms. However, there are clearly significant barriers to effective FDI in both directions and these findings should be of interest to SME owners, investors and government policymakers and agents. 5.1 Future Work As the next stage, the authors are considering carrying out more in-depth fieldwork in both Canada and China to further investigate and validate these initial findings. 6. References 1. Barney, J. B., and Zhang, S. (2009), The future of Chinese management research: A theory of Chinese management versus a Chinese theory of management. Management and Organization Review, 5(1), pp BBC News. (2015, January 30th, 2015), China overtakes US for foreign direct investment. Retrieved February 4th, 2015,

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